Results: Harvey Norman’s Very Poor Interim Figures

No wonder Gerry Harvey spent 2011 moaning and groaning about the slow retailing sector, and it's also no wonder that he's gone silent in recent weeks.

While the 2010-11 financial year was nothing to write home about, the first half of the current year has been rotten, forcing the company to cut dividend after a 36% slide in earnings from its key retailing business.

And it's also no wonder the company's shares, after rising 2% before the results were released yesterday morning, slumped 6% to a low of $1.975 as investors abandoned the stock and market chat started talking about possible private equity interest.

The shares ended the day down 9c or 4.1% at $2.07.

In fact the company's December quarter retailing performance was terrible, with falls of more than 9% in same store (like for like) sales, which is far worse than the overall retail sector (as measured by the Australian Bureau of Statistics) which saw sales rise by less than half a per cent over the same three months.

Harvey Norman (ASX: HVN) said yesterday that pre-tax earnings fell 17.7% to $163.47 million for the December half year, from just over $193 million for the first half of 2010-11.

And, if it hadn't been for a big rise in property profits and a small property revaluation, the result would have been worse, judging by the 36% fall in earnings from the company's key franchising business (the heart of its retailing operation) down more than $54 million to $95.5 million.

The reasons for the slide were lower sales, lower rents and franchise fees and more support for franchisees doing it tough, especially in the final three months of last year.

That makes it easier to understand the cut in the interim dividend to 5c a share, from 6c last year and 7c for the December half of 2009.

In fact for Harvey Norman and its franchisees across more than 180 stores in Australia, it would have been a miserable Christmas.

In Australia, sales at Harvey Norman slipped 6.8% in the first half but were down 10.2% for the December quarter of 2012 against the second quarter of 2011.

On a like-for-like basis (the best guide for retailing performance), sales within Australia were down 6.6% for the half and 9.5% for the December half.

In fact so bad were the figures, that Harvey Norman released the sales data yesterday, with the profit report. A year ago the sales data were released two weeks before the profit.

Overall revenue in the December half from its operations in Australia, New Zealand and Europe fell 6.1% to $3.11 billion.

Like-for-like sales for the first six months of 2011-12 fell by 6.3%, a very weak performance.

After tax profit eased just 2.1% to $128.95 million thanks to the boost from property and lower tax, a point many reports yesterday failed to point out included the higher contribution from property.

The retailer's business in Slovenia and Croatia recorded strong total sales growth in the first half, up more than 15%, but comparable or like for like sales showed a 14.9% drop.

The company said its Australian furniture and bedding business recorded strong sales during the first half with the recent placement of the Sleep City Everyday Living brand into administration, a positive for its own operation. Sleep City is going to close in the next few months, according to a statement from the administrators yesterday.

"The result before tax of the franchising operations segment was $95.51 million for the half-year ended 31 December 2011 compared to a result of $150.36 million for the preceding period, a reduction of 36.5%," Harvey Norman said.

"Our franchisees are committed to driving sales growth and growing market share.

"However, retail gross profit margins have suffered due to the strength of the Australian dollar, price deflation in the AV/IT category and intense competitive pressures in the flat panel and computer hardware categories.

"These factors have reduced franchise fees received. A higher level of tactical support was required to assist the franchisees to manage a difficult environment.

"Our franchisees are well-positioned to take advantage of any uplift in discretionary spending in the local market.

"We will continue to invest in the ongoing development of our robust franchise system.

"Sales revenue generated by independent franchisees amounted to $2.58 billion for the half-year to 31 December 2011 compared with $2.74 billion for the preceding period, a decline of 6.0%.

"This reduction has translated into a decrease in the profitability of the franchising operations segment.

"Revenue received from franchisees decreased from $536.27 million in the previous period to $511.94 million for the current half, a decrease of $24.33 million or 4.5%.

"Tactical support payments have increased during the current period to assist franchisees to effectively compete in their local markets.

"Franchisees continued to grow market share across key product categories. Franchisees remain well placed to take advantage of any improvement in discretionary retail spending by consumers.

"A strong property portfolio is an essential component of the Harvey Norman integrated retail and franchise system.

"Our consolidated property portfolio is valued at $2.12 billion as at 31 December 2011," the company said.

"This represents 50% of our total asset base as at balance date. The result before tax generated by our property segments represents 42% of our consolidated profit before tax for the half-year ended 31 December 2011.

"Our property segments delivered a strong result before tax of $68.77 million for the half-year ended 31 December 2011 compared to a result of $47.18 million for the previous period, an increase of 45.8%,"directors said.

(At yesterday's close Harvey Norman's market cap is $2 billion, or less than the value of its property portfolio, which is absurd as the market is valuing the retailing side of the business at nil or worse.)